Restoration Revealed

When insureds have a claim for a fire or flood, the people they will end up having the most direct interactions with will not be their broker or even the adjuster, but the staff of the restoration company doing the dirty work of making them whole again. Yet many brokers don’t deal with restorers on daily basis and consequently don’t give much thought to the business challenges faced by these companies today, or why they should get to know them.

To provide brokers with further insight into the restoration sector, Canadian Insurance Top Broker convened a roundtable discussion with executives from five of the top firms in the country. The discussion was held December 10 in our offices at Rogers Media.

Simon Frigon: CDRG’s primary focus is to represent its members, and to ensure that we have a voice amongst the national players out there. We’re almost like a cooperative of property specialists. Our clients are really our members and our revenue streams are not really dependent on claims and disaster itself.

Stephan Roy: ServiceMaster Restore is a franchise system. We’ve been operating in Canada since 1953 and have a national scope. We are a privately held company and owners have a stake in the business.

Steve Blinco: Strone is set up as a corporate structure. We actually started off as a franchise 25 years ago, but we separated ourselves from that feeling that consolidating the number of the services we had was more beneficial to us.

Lorne McIntyre: GUS Group is a franchise system, like ServiceMaster, but a little bit different in that we co brand. We give the franchisees an opportunity to keep their name, keep their established business that they’ve grown over the years, and build a reputation in a local market.

Bruce Derraugh: FirstOnSite is corporate, similar to Strone, where we have all of our services housed in a central fashion. We are 45 locations across the country, and we are in every province except for Newfoundland.

What are some of the pros and cons of these different structures?

Simon Frigon: What our members are looking for is co-branding opportunities so they can keep their independence and their names that they’ve built from the ground up, but use CDRG to their advantage in these national RFPs that are coming to the table. If you’re an independent and you’re not able to band with another group, it’s going to be very difficult in the future to get work from these larger insurance companies.

Lorne McIntyre: What I like about franchising is it provides a vehicle for us to expand, while taking some of the extra pressure of going out and buying companies, because you’re sharing that risk with the individual business owner.

Steve Blinco: The model that we’ve tried to structure is to provide the insurance companies more consistency. When you’ve got a lot of service individuals, like in the franchise arrangement, and even in the corporate structure, it’s difficult to have all of your branches function the same way for your end insured.

Stephan Roy: Consistency is an issue, because we’re dealing with a service product, and we’re dealing with people. We’re not building hamburgers, and a product that is easily replicated. Every claim, every job is different.

What are the revenue challenges for restoration companies today?

Steve Blinco: Theinsurance industry has imposed a lot of tasks at administrative levels to our business. They are demanding price control on our services, and they’re also trying to pull back discount credits on the work we do. We’re asked to go out and attend and inspect a loss and a lot of times that’s on our own dime, unless we actually get the work. And in some cases we even incur some sub-inspection costs in light of the fact that we’re providing a service to inform the insurance companies of the damages caused.

Bruce Derraugh: It would be easier if they all had the same, or similar, expectations. But the expectations are so far all over the map, that it actually requires us to follow numerous different processes. We’re national. In every province you’ve got different expectations. Even within a province you’ll have different requirements.

Lorne McIntyre: I think we’re getting to that point where insurers are asking for more and more every day, and we’re getting less and less in return. I think there’s been a perception over the years that the owners of restoration companies own mansions, are millionaires, and all this stuff, when the reality is our profit margins are much, much lower than what they used to be.

We had an issue earlier this year where an insurer wanted to give us the business, but they were asking for a lot of service-oriented services, in return for us not to be able to charge. We had to go back to our franchisees and say, “Is this good business?” I just think we’re reaching a point with some insurers where we may have to sit back and see if it’s going to be profitable for our business.

Stephan Roy: Some carriers will allow you to paint the entire room, other carriers will only let you paint one wall. So the end consumer says “what do you mean you’re only painting one wall?” And so that’s the point where we’re caught in the middle of those types of balances between serving the customer and keeping them happy and serving our other customer that’s helping drive revenue opportunity to us.

Bruce Derraugh: In that situation, if you don’t paint the entire room, then the customer doesn’t sign off on the customer satisfaction report. So then you don’t get paid, and then it sits in Accounts Receivable, which is our biggest issue in the industry. Probably the biggest factor that affects our profitability is not getting paid in a timely basis.

What other factors have an impact on revenues?

Steve Blinco: A lot of times an insurance company, if they don’t have the resources, will use an independent adjusting firm to look after the claim. So now we’re trying to satisfy the independent adjuster (IA), the insurance company, and the client. And a lot of times the paperwork that goes from us to the adjusting firm takes a long time to get to the insurance company, and that drags it out even longer. And it’s usually compounded because of the fact that those claims that are subbed out to the adjusting firm are usually larger losses.

Bruce Derraugh: In those large losses you’ve got an IA, an end customer, the insurance company, and you have a broker, too. Certain brokers believe that they need to be involved in the actual restoration process and are also demanding communication. So in some cases you have four different customers you’re trying to please, which is slightly schizophrenic.

Stephan Roy: Not everybody has the same agenda. The broker is trying to satisfy the needs of their customer, the IA is trying to satisfy the cost containment within a file, a carrier is trying to reduce their exposure, all while trying to maintain retention within the business. There are a lot of different forces that are at play, and because we’re in the middle of that we’re trying to satisfy all of those needs.

Simon Frigon: There’s actually another person that we probably forgot to mention, and they’re going to become more important; that is the third party. Companies like Crawford Connection sometimes are added to the mix, and it makes it very difficult for vendors or contractors to work with these third parties simply because, they’re dealing with us from Jacksonville, Florida. So sometimes you’re dealing with them on the phone, and they want us to send pictures because they’ll question whether we are fully recovering the losses etc. It makes it very complex. So, many of our members now have hired staff just to take care of these vendor programs. And that takes up a lot of your profit margins right there.

How was business for your companies in 2012?

Simon Frigon: In talking with the members, we are definitely down as far as claim counts goes, but I think for us the total volume of the group is pretty steady if we look at the last three years. And I think one of the main reasons is homeowners are renovating their basements, they’re getting into a lot of technical stuff. Whether it’s surround sound, or custom bars, or kitchen cabinets, the average claim is pretty much going up on an annual basis. If you look at how much a claim costs to mitigate and renovate from start to finish, I think that’s where you’re seeing an increase in the fact that deductibles are going up to sometimes $2,000.

Steve Blinco: In the last three years, it’s been pretty flat. Claim count-wise, though, my understanding is that it’s been down. And that makes it challenging for all of us to be profitable. We’re always trying to find the next insurer whose list we can get on. So we’ve had to adapt, restructure, reorganize. And there is also a lower availability of emergency work. Most of the emergency claims are almost half the value than what they were three years ago, at least from our numbers. And as the administrative costs increase, it just makes it all that more challenging.

Bruce Derraugh: What you’re seeing in the industry is bigger disasters. We’re getting more volatile weather. We’ll go six months with beautiful weather, and then we’ll get CAT after CAT. I think in the past, where it would be just kind of a running total of claims coming in, now it’s very much more up or down. Feast or famine, which obviously causes you to really evaluate the business.

Your ability to maximize value in catastrophes is an important factor. For instance, in a given CAT, you may have maximized the number of claims that you could handle. If you can’t do more than that then you really are missing an opportunity. Because that could be the only activity that you’re going to get in that particular market for a period of time.

How is climate change affecting the restoration sector overall?

Stephan Roy: We’ve had to adapt to become a very lean provider. And so when you do get a spike in claims, the challenge is greater than maybe it was at one point. We’re not a firehouse, we don’t have guys sleeping upstairs waiting for the bell to ring. The challenges are really around the ability to have qualified people and resources to manage that additional influx. Some of us that are larger in scope have the ability to manage that greater than others that may not have the same scale.

Lorne McIntryre: Go back to 2010, Ontario specifically. We were decimated. There were no CATs. It was the driest summer on record. So a lot of the players that were here, they just couldn’t sustain a business. So they did go away.

Bruce Derraugh: What we’re driving for right now is more technology to actually start to eliminate the administrative burden. You want to be lean, but if I’ve got to throw more bodies at a solution from an administrative perspective, it’s going to be very difficult if there are long periods of drought or lack of claim activity. So I think that the business has moved from being a lot of independent players to needing to be part of a network, be part of something in order to leverage claims and be on lists.

How is consolidation in other parts of the insurance industry affecting restoration companies?

Bruce Derraugh: As the insurer gets bigger, they have a bigger stick, so they have an ability to provide bigger rebates or requirements of what they’re looking for. The pro is that will reduce the number of different protocols and measurements, so you’re dealing with fewer variables.

On the broker side, I think there’s an opportunity for them to engage as they come together and become bigger. They have an opportunity to deal with their end customer in a much closer and attentive way.

Lorne McIntyre: I just think consolidation, overall, is going to put more pressure on the insurer to drive down costs and set prices. I’m fearful that we’re going to come to the point where the insurers say, “Here’s the price, take it or leave it.”

Stephan Roy: I think one of the challenges of consolidation is that there’s a misconception that volume brings greater profits. It’s not like building widgets where, because we can build more of them, we can produce them cheaper. In a claim-by-claim environment, it’s not necessarily an accurate distinction.

How is job-quoting software such as Xactimate changing the restoration industry?

Stephan Roy: I think the challenge that we have with the product is that we’re being dictated how to use it, and it’s not necessarily being used the way it was designed to be used. Xactware originally built its platform to serve the general contractor or the restoration contractor, and now they’re also trying to serve the insurance customer at the same time.

Steve Blinco: Xactimate has driven itself into the administrative end to provide additional service to insurance companies in terms of reporting, restoration company turnaround of estimates, etc. Because the data gets entered by various individuals on the reporting end, it’s rarely ever accurate. And this additional cost has gone through the roof, really. That’s the component that’s driven our administrative costs high.

Simon Frigon: The only issue I have with it is sometimes we see the insurance companies using their own price list, and that price list is not being dictated by the going rate. So you could sometimes have a price list from an insurance company that’s two, three years old. They don’t consider inflation or anything like that. But in my view, Xactimate is a good working tool and we need it.

Why do you think it’s important for brokers to have a good understanding of the restoration sector?

Lorne McIntyre: I think the best asset a broker has over an agent or a direct seller is they have that client right in front of them. They have an opportunity to discuss the claims process. They can tell clients, “In the event of a fire or water emergency or hail or whatever, this is what will happen.”

Bruce Derraugh: The more they have a vested interest in the cycle and what the customer is going through, the better they are able to provide advice and direction. You could hear that your clients’ last four claims with a particular company was not a positive experience. You should be involved, otherwise it could potentially come back on you as a broker and you could lose some customers.

In your view, what are some of the most important areas where brokers can improve?

Steve Blinco: Making clients aware of what their limits are. So many times we will get in a position where clients are reaching their limits and they haven’t even been informed about it.

Stephan Roy: I think they’re educated at the time of sale. But when was the last time you talked to your broker? In the dwell time to a claim process, they’ve completely forgotten what they’re covered for and what they’re not covered for.

Bruce Derraugh: I think when they say they have no ability to influence the decision, they do. It doesn’t mean they can make the decision, but they can certainly influence it if they take more of a vested interest in it.